REITs to ease Saudi housing shortage, boost transparency

The Saudi stock exchange’s (Tadawul) plan to list Real Estate Investment Traded Funds (REITs) by year-end could potentially enhance transparency in the property sector and ease the kingdom’s housing shortage, analysts told Argaam.

Globally, REITs typically make institutional real estate markets more accessible to a larger pool of investors, including smaller ones who may have had difficulty investing in property due to the value size of assets, said Tim Rose, head of real estate at Emirates NBD Asset Management.

“Such legislation promotes transparency in local real estate markets, giving investors more confidence in this sector,” he added.

David O’Hara, director and head of Cluttons Saudi Arabia, agreed that REITs could promote transparency in the market, noting that this could help attract more investment.

“Transparency is what's going to attract the international investors. You can get the returns on real estate in other countries, but institutional investors are drawn to the transparency, which we will see in something like the structure of the REIT.”

The new REITs – which will be listed on an independent sector in the equity market – will allow investors to access local real estate through the purchase of existing, developed property.

Under regulations recently approved by the Capital Markets Authority, the funds are prohibited from investing in vacant lands, and are required to distribute at least 90 percent of their annual net profit to unit holders.

Anthony Hobeika, CEO at Dubai-based MENA Research Partners, noted that the REITs could help tackle Saudi Arabia’s housing shortage by offering investors and developers an alternative to traditional bank lending.

“Opening up the capital markets can provide a new source of finance at better terms, thus promoting new investments into the real estate sector,” he told Argaam.

Moreover, as REITs are publicly traded, they can provide more flexibility for investors, who will not have to be locked into an investment or property. This would make real estate “a relatively more liquid investment than before,” Hobeika explained.

Saudi Arabia’s move to list REITs comes in line with the kingdom’s Vision 2030 plan, which aims to develop the capital market by providing new trading instruments to diversify investment options.

This diversification is healthy and will enhance Tadawul’s market penetration, said Akber Naqvi, executive director & head of asset management at Al Masah Capital.

“However it is important that a viable, liquid trading market is also built around these REITS. Owning assets that are illiquid and seldom traded will otherwise reduce their attractiveness,” he cautioned.

Write to Jerusha Sequeira at jerusha.s@argaamnews.com